How to maximise tax-free super

Depending on your age, there are a range of strategies to boost your tax-free super component.

Summary: Non-concessional contributions made into super under the age of 60, and prior to starting an account-based pension, can have substantial tax benefits. There are also benefits for those aged over 60 if you are still working.
Key take-out: The Tax Office does not currently view non-concessional contributions as a means of reducing the tax-free component of super as tax avoidance. But before embarking on this strategy, seek professional advice.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

In my last column for 2013 I answered the five most asked questions by Eureka Report subscribers. One of the questions, relating to the benefits of maximising the tax-free component of a person’s super, mentioned that there were a number of strategies that can be used to achieve this. This comment has produced a number of questions from subscribers about what these strategies are.

One of the first strategies relates to withdrawing a lump sum from superannuation and then re-contributing the amount withdrawn as a non-concessional super contribution. This strategy can provide different benefits, depending on the age of the member concerned.

Maximising tax-free superannuation in many circumstances does not benefit the member. The only exception to this is when the re-contribution strategy is used by someone who is under 60 years of age and they are retiring.

Reaching preservation age

This condition of release can only be used to access super once a person has reached their preservation age. This strategy is really only open to people who were born before June 30, 1964. This is because for people born before July 1, 1960, the preservation age is 55, and this increases in yearly increments until the preservation age is 60 for those born after June 30, 1964.

If someone has reached preservation age and they are retiring (with the definition of retirement being the intention to work less than 10 hours per week), all of their superannuation at the date of retirement is no longer preserved and they can access it either as a lump sum or as an account-based pension.

If an account-based pension is started without taking a lump sum the taxable portion of their superannuation account will result in some of the pension received being taxable. Depending on the size of pension received, income tax may be payable on part of it. This is because only that portion of a person’s tax-free account-based pension is tax free if they are under 60.

If someone is under 60, and their superannuation is made up of entirely taxable super, this means the entire account-based pension will be taxable, although a tax offset of 15% of the pension is received.

If someone who is under 60 takes a lump sum payout up to the tax-free lump sum threshold (currently $180,000), and this is combined with any investments outside of superannuation, and then a non-concessional contribution is made prior to commencing the pension, the pension will either be entirely made up of tax-free super or a large component will be tax-free.

The amount of the non-concessional super contribution that can be made is limited by the contribution limits in place. This does mean, however, that if a person gets the timing of the non-concessional contributions right, and they have not exceeded the $150,000 limit in the previous three years, they can contribute up to $600,000.

To maximise this non-concessional contribution, $150,000 would be contributed prior to June 30 of one financial year, with $450,000 contributed after July 1 of the following financial year. If nothing further is done, the non-concessional contributions are added to the existing tax-free component and used when a pension commences.

Is this considered tax avoidance?

Some experts have stated that anyone using this strategy could become subject to anti-tax avoidance legislation. The Tax Office in the past has stated that it does not regard this strategy as tax avoidance, but its approach could change in the future. As a result, professional advice should be sought before implementing the strategy.

When the re-contribution strategy to maximise tax-free benefits is implemented for someone who is 60 or older, it provides them with no tax benefit. This is because once a person turns 60, all of the superannuation they receive this tax-free. However, the re-contribution strategy to maximise tax-free benefits does benefit their non-dependant beneficiaries. When a member dies, taxable benefits received by non-dependants are taxed at 16.5%, while tax-free benefits inherited have no tax payable on them.

Interestingly, when the re-contribution strategy is used to maximise tax-free super to reduce the tax payable by non-dependant beneficiaries there is a reduced likelihood of it being attacked by the ATO. This is because the person entering into the scheme or arrangement does not actually receive any tax benefit.

Where someone has tried to maximise their tax-free super by having two pension accounts – one being made up of nearly entirely tax-free super and the other predominant be made up of taxable super – the benefit of the re-contribution strategy is maximised by only taking the minimum pension from the tax-free pension and the rest from the taxable pension.

People aged over 65

The re-contribution strategy can only be used by a person who is 65 or older if they meet the 40 hours work test. In addition, once a person turns 65 they are limited to making $150,000 a year in non-concessional contributions and cannot bring forward the next two years’ super contribution limits.

However, when a member is 65 or older and they are still working either in paid employment or by carrying on a business, and they do work 40 hours in a continuous 30-day period in the year that the contribution is made, there are still some benefits to be obtained from the re-contribution strategy.

The second strategy related to maximising tax-free superannuation benefits is not as direct as the re-contribution strategy. It does, however, firmly fit into my general outlook on life: behind every black cloud there is a silver lining. In this circumstance, if the black cloud is a sharp downturn in the value of a super fund’s investments, the silver lining is the opportunity to increase the percentage of tax-free super benefits.

When a superannuation account is in accumulation phase, tax-free benefits are stated as a dollar value. The only way to increase tax-free benefits in accumulation phase is to make further non-concessional contributions. When an accumulation account is converted to pension phase the tax-free component is expressed as a percentage of the total benefit.

Locking in tax-free benefits

The value of a person’s taxable benefits in superannuation is calculated by subtracting the total value of their tax-free benefits from their total member’s balance. Because taxable superannuation is calculated this way, and when there is a drop in the value of a member’s superannuation account, the percentage that tax-free benefits make up of the member’s account increases.

This means that if a super pension is started after a major drop in the value of a member’s super balance, the increased percentage of tax-free benefits is locked in. An example of this is a person who has super in accumulation phase of $200,000 that is made up of $100,000 in taxable and $100,000 in tax-free benefits. As a result of over-investing in the mining sector, their super balance drops to $165,000.

If they commence a transition to retirement pension after the drop in value of their super, they will lock in a tax-free percentage of just over 60%, up from 50%. As the mining sector shares recover, the dollar value of their tax-free super increases.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au